Power Failure: The Energy Crunch Emerges as the 21st Century's Top National-Security Issue

Michta, Andrew A., The American Conservative

ON MAY 2, 2008, Goldman Sachs finally called it: the super-spike endgame in oil has begun. The price per barrel of crude could reach $200 in the next six to 24 months, with continued extreme volatility. The report confirmed what the U.S. Department of Energy chooses to ignore but others have been saying since at least 2005: we have entered a period of "peak oil," in which demand consistently outstrips global supply, amid growing uncertainty about the price of energy and the availability of reserves.

About a month later, Morgan Stanley warned of a "monumental transfer of wealth to oil exporters, which may last beyond our generation, with important geopolitical and security implications." Receipts of oil exporters are running as high as several billion dollars per day, with $1 billion going to Saudi Arabia. OPEC's surplus this year is projected to reach $500 billion, with most of it flooding into sovereign wealth funds--essentially investment arms of foreign governments. At the oil price of $135 a barrel, Morgan Stanley estimated that the stock of the proven reserves of the six Gulf Cooperation Council countries would be worth about $65 trillion. By comparison, the world's total public equity market capitalization is around $50 trillion.

A glance at the exploding skyline of Dubai tells the story better than reams of market-intelligence reports. We are in the midst of the most massive wealth transfer the world has ever witnessed, and it is driven not by market forces but by an increasingly state-controlled global energy-supply monopoly. Unchecked, this economic shift will result in a radical reordering of the global balance of power.

The most common explanation for the energy crunch is the widening gap between supply and demand, with the culprit--depending on one's ideological predilection--being shady oil companies or skyrocketing consumption in the United States, European Union, China, and India. These explanations are partly true but incomplete.

According to EU projections, between 2002-2030, demand for oil in the U.S. and Canada will grow by 34 percent from 19.7 million barrels to 26.3 million per day. The EU will see its energy needs expand 15 percent, and Japan and Korea will consume an additional 11 percent. China's demand will grow by a whopping 157 percent over the same period--from 4.9 million barrels per day to 12.7 million--displacing the EU as the second largest consumer of oil. India will consume an additional 124 percent.

But there is little direct connection between present demand and the surge in prices. From 2002 to 2007, the price of oil rose $60 per barrel, then last year it jumped another $60. Consumption, while rising, had scarcely doubled.

Focusing exclusively on market demand assumes that suppliers play by the rules of the marketplace. But in an environment in which resources are nationalized, price is not set by the market. Energy producers' strategic goals and security objectives are driving the supply side of the equation, even as we continue to consider the crisis in pure market terms.

Of course, some of the price increase can be associated with speculation, with the flood of new institutional investors or the collapsing dollar. But the most direct explanation points to persistent uncertainty and fear that the emerging oil and gas supplier monopolies--on a scale unseen until now--have the ability to dictate price at will. The relentless escalation is driven by the anticipation that demand will continue to rise while the already limited supply will be kept low by the actions of government-controlled oil and gas cartels, moving toward a complete disconnect between prices and available reserves.

Since the creation of OPEC, the pricing of oil has been an exercise in market manipulation. The openly stated goal of the organization is to control the world oil market by "regulating oil production and production standards." Since its inception, OPEC has shown itself to be one of the most prosperous and effective monopoly alliances in history, notwithstanding occasional cases of individual members acting outside the agreed upon production and pricing targets, as in the mid-1990s when overproduction led to the collapse of the oil price. …

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